Danish Bank Default Risk Reduced After Rescue Plan, S&P Says

Danish legislation aimed at spurring
bank industry consolidation will reduce the risk of default
after lawmakers made it easier for lenders to avoid the Nordic
country’s bail-in rules, Standard & Poor’s said.

“This is creating new tools to solve problems,” Per Toernqvist, a Stockholm-based analyst at S&P, said yesterday in
a phone interview. “These measures will likely lead to fewer
failures.”

Moody’s Investors Service, which downgraded six Danish
banks in May, including the country’s biggest Danske Bank A/S,
signaled today it will reconsider its view on Denmark’s lenders.

Lawmakers yesterday backed the country’s fourth bank bill
since 2008, enabling lenders to sidestep legislation that has
twice triggered senior creditor losses and left most of
Denmark’s roughly 120 banks with no access to international
funding markets. S&P said last month 15 more Danish banks could
default, costing as much as $2.3 billion in the next three
years.

Denmark’s bail-in law, effective since October, “created
an incentive for good banks to wait for bad banks to fail and
share the losses with senior creditors and the government,”
Toernqvist said. “With this new proposal, you open the door to
a much broader spectrum of solutions. It might be that you have
failures but there are definitely now opportunities to find
other solutions.”

Moody’s Assessment

Moody’s is assessing the details outlined in the political
agreement on a new Danish banking package for any potential
credit implications, said a press official at the rating
company, who declined to be identified by name.

The latest bill seeks to encourage takeovers before
troubled banks are forced to declare themselves insolvent. The
bill allows the state to assume bad loans in the event of
takeovers, Economy Minister Brian Mikkelsen said yesterday. The
plan, which will be funded by the financial industry, also lets
merging banks tap the depositor guarantee fund. Denmark’s
parliament still needs to give the bill final approval before it
can take effect.

“We’ve provided a framework for healthy banks to take over
unhealthy ones,” Mikkelsen said. “The government will not lose
money and the sector will pick up the bill. This package will
help improve the perception of Denmark’s bank industry abroad.”

An earlier bill designed to encourage consolidation failed
to prevent the collapse of Fjordbank Mors A/S, which in June
became Denmark’s second regional bank after Amagerbanken A/S to
resort to the country’s bail-in laws.

Lower Risk

Yesterday’s plan will also help provide funds in the event
of takeovers by extending state guarantees originally due to
expire by 2013 by as much as three years. In addition, the
government will set up a board to identify too-big-to-fail
banks.

“The new bank deal will remove tail risks from investing
in Danish banks,” Lars Rohde, chief executive officer at the
ATP fund, the biggest investor in Danish shares, said yesterday
in an interview. “This has made it safer to invest money in
Denmark’s banks as it reduces systemic risks.”

ATP owns about 3 percent of all Denmark’s listed equity,
including shares in Danske Bank A/S, the country’s biggest.
Rohde wouldn’t say if the Hilleroed, Denmark-based fund will
increase its holding of Danish bank shares as a result of the
new legislation.

“There’s no doubt that there are some banks in trouble and
we’ve now given the sector the tools with which to solve this,”
Mikkelsen told TV2.

The central bank has also stepped in to help ease liquidity
pressures. The bank said last week it will accept bank loans as
collateral. The measure, which becomes effective Oct. 1 and runs
until further notice, will “ensure the banking industry has
sufficient liquidity ahead of the 2013 expiration of state-
guaranteed bonds,” said Thomas Hovard, chief analyst in
corporate bonds for Danske Markets, a unit of Danske Bank.

“The economic recovery in Denmark over time will sort out
the health issues of the Danish banking industry, and that may
take some time,” said S&P’s Toernqvist.